by Walden Bello (FPIF)

Germany towers over Europe like a colossus. Its economy is the biggest in the European Union, accounting for 20 percent of the EU’s gross domestic product. While most of Europe’s economies are stagnating, Germany’s will have grown by some 2.9 percent in 2011. It boasts the lowest unemployment rate, 5.5 percent, of Europe’s major economies, compared to those of France (9.5 percent), the United Kingdom (8.3 percent), and Italy (8.1 percent).

In many ways, Germany is like Japan. Both countries were forced to give up armed expansion during the Second World War, only to have the national energy channeled into building formidable economies. But whereas Japan faltered in the 1990s, Germany has steadily plowed ahead, becoming the world’s biggest exporter from 1992 to 2009, replaced in first place by China only in 2010.

With the recent agreement by all EU countries to move toward tighter coordination of fiscal policies, the prime mover of which was Germany, Germans and other Europeans alike feel that a new era of German primacy has begun. Not only is Germany the strongest economy in Europe; it is also now writing the rules of economic governance.

Unbalanced Relationship?
This has brought a deep feeling of unease to other Europeans who, as a BBC report puts it, now face a future “of being told what to do by the Germans.” Many Germans are also bothered by the turn of events, among them the country’s opposition Social Democrats (SPD).

At the party’s Congress in Berlin earlier this month, Helmut Schmidt, the former prime minister and grand old man of the party, summed up the troubled relationship of Germany, which straddles the geographical center of Europe, with the rest of continent thus: “When the center is weak, the periphery moves into the center. When the periphery is weak, the center expands to the periphery.” The key to a stable Europe is a balanced relationship.

That balance has been disrupted by recent developments, he implied. The center has become too strong, and nations now fear dictation of their economic governance by Germany and its preferences for fiscal and monetary tightness, strictures against debt, and obsession with inflation. Moreover, the fear of economic supervision by Germany is coupled with the fear that the austerity measures the Merkel government is promoting might provoke recession or depression—and he reminded his audience that it was deflation and depression, not inflation, that ended the Weimar Republic, the first attempt at democracy in Germany, and brought Hitler to power.

The SPD Reforms
Schmidt’s Social Democrats view Germany’s condition with deep ambivalence. One wing of the party attributes Germany’s ability to ride out the European recession to the labor and pension reforms carried out by the Social Democratic government of Gerhard Schroeder from 1998-2005. In their view, the SPD did the dirty work, and Angela Merkel and her conservative coalition ate the Social Democrats’ lunch.

The reforms, packaged as Agenda 2010, were a Thatcherite package that relied on cutting medical benefits, slashing pension and unemployment benefits, raising the age of retirement from 65 to 67, outsourcing health insurance, and abolishing craft requirements. Perry Anderson described this package as “a more comprehensive bout of neoliberal legislation than [Britain’s] New Labor, a much invoked model, was ever to do.”

A conservative government could not have carried them out with evoking massive resistance, say some activists. Only a labor government could discipline labor. But the price paid by the Social Democrats was high. Some 100,000 members, including former Finance Minister Oskar Lafontaine, split from the party, with many joining the former Communist Party of East Germany (renamed the Party of Democratic Socialism, or PDS) to form the “Die Linke” party, or “The Left.”  Trade union members also withdrew their allegiance to the party en masse, and the loss of their support was a key factor in the party’s rout in the 2009 elections, when it suffered the heaviest losses in its history and saw its seats in the Bundestag reduced to 23 percent. As Achim Post, head of the SPD’s International Politics Department, put it, “This was a case of the party doing something that was for good for society but not in the party’s best interests.”

But for many members of the SPD, what orthodox economists see as a new resiliency in the German economy has to be balanced against the emergence of new social inequalities. An OECD study in 2008 discovered that inequality and poverty increased more rapidly in Germany in 2000-2005 than in any other OECD country. While unemployment stands at a relatively low 2.7 million at present, a large number of the employed do not earn enough to meet their basic needs and must resort to state subsidies.

Indeed, some Social Democrats like Thomas Meyer, author of a well-known book on social democracy, claim that a great deal of Europe’s current troubles stem from the Schroeder reforms. The fall in domestic demand owing to a sharp cutback in purchasing power forced German companies to step up their efforts to export their product to the rest of Europe, resulting in the trade imbalances between Germany and key European economies. This became one of the key factors forcing the latter to engage in massive foreign borrowing to cover their trade deficits.

Challenging Merkell
At the SPD Congress in Berlin, the party was in high spirits, having just come off a string of eight straight victories in regional elections, including the recapture of the old SPD stronghold of North Rhine-Westphalia in western Germany’s industrial heartland. There was talk of “putting the wild beast of capitalism back in its cage,” as one speaker put it, though the proposals for an electoral program were rather tame: among them, an increase in the rate of taxation of the wealthy from 42 to 49 percent, a wealth tax imposed on the very rich, a financial transactions tax, educational assistance for the less privileged, and an obligatory national minimum wage.

The Social Democrats know, however, that they are up against a formidable foe in Angela Merkel. Unlike Margaret Thatcher, Merkel is a pragmatist. She has absorbed the lessons of running an ideological campaign since her party’s near defeat in the 2005 polls, when a weakened SPD nearly overtook the conservative coalition on election day as voters turned away from Merkel’s anti-state, pro-market rhetoric. Of late, Merkel has been accused of stealing the Social Democrats’ key proposals. Her government is now phasing out nuclear power plants, long a key element of the programs of the SPD and the Greens. She has also recently indicated that she is in favor of the minimum wage, another Social Democratic proposal. “She keeps stealing our programs,” joked one activist at the Congress. “Soon we’ll be left with nothing.”

But Merkel is not the only obstacle to the SPD’s coming back to power. An electoral coalition among the SPD, the Greens, and Die Linke for 2013 would be a strong contender in the elections. Unfortunately, there is no question of an alliance with Die Linke, which got nearly 12 percent of the vote in 2009. There is little enthusiasm in the SPD mainstream for an alliance with Die Linke, many of whose founders are seen as tied to outmoded class politics. And there is also little desire among the former SPD militants in Die Linke for a coalition with the SPD, whom they regard as having betrayed labor. Thomas Meyer, in fact, says that the former communists in Die Linke are more favorable to an alliance with the SPD than the former SPD members.

Being more than Europe’s Fiscal Inspector
But the 2013 elections will be about more than just domestic issues. The relationship between Germany and the EU will a central concern of voters, and Merkel will try to present the recent fiscal pact as a case of creative German leadership to the European crisis. Indeed, The New York Times has described the recent agreement as a victory for Germany’s “favored remedy for the sovereign debt crisis that has shaken the Union for months: fiscal discipline, central oversight, and sanctions on countries that break the rules on debt limits, which will be written into national laws.”

But the SPD paints the deal as too little too late.  The SPD accuses Merkel of having irresponsibly catered to the Germans’ strong populist aversion to bailing out the Greeks at the beginning of the sovereign debt crisis in 2010, thus worsening the crisis. The deal on the Greek debt reached a few months ago, which involved writing off half of the Greek debt and the private banks taking losses in return for the Greeks implementing a draconian austerity program, came very late in the game. In the meantime, German and French indecisiveness contributed to the attack by the markets on the other weak economies of Southern Europe: Portugal, Italy, and Spain.

Rather than leading, Merkel, in the SPD’s view, has put obstacles in the way of a truly comprehensive strategic plan to turn Europe’s crisis around. Some Social Democrats have assailed the fiscal pact as a short-sighted remedy that has no vision except that of Germany looking over everyone else’s shoulder, which, with its focus on fiscal discipline, might condemn the continent to a long period of little or no growth.

With the predominant German attitude of looking down on the crisis-ridden countries as profligate, hedonistic Mediterranean spenders, it will be a challenge for the Social Democrats to forge a more responsible German policy toward Europe and promote a more positive vision of Germany’s relationship to Europe among Germans. But they have no choice but to go beyond the Merkel formula of Germany as economic disciplinarian.

As Helmut Schmidt told the party faithful at the Congress, resurgent fears of domination by Germany had a basis in the past wrongs Germany had inflicted on its neighbors. Their fears were justified. More importantly, Germans had to relearn that their political and economic success in the last 60 years would not have been possible without the “support and solidarity of others,” and that it was now Germany’s turn to “show solidarity with our neighbors.” Otherwise, Germany might “risk isolation in Europe.”

Foreign Policy In Focus columnist Walden Bello, a member of the House of Representatives of the Philippines, was a guest at the recent Congress of the Social Democratic Party of Germany in Berlin.